Red Tape Rising: Obama’s Torrent of New Regulation

Red Tape Rising: Obama’s Torrent of New Regulation

Abstract:The burden of regulation on Americans increased at an alarming rate in fiscal year 2010. Based on data from the Government Accountability Office, an unprecedented 43 major new regulations were imposed by Washington. And based on reports from government regulators themselves, the total cost of these rules topped $26.5 billion, far more than any other year for which records are available. These costs will affect Americans in many ways, raising the price of the cars they buy and the food they eat, while destroying an untold number of jobs. With the enactment of new health care laws, financial regulations, and plans for rulemaking in other areas, the regulatory burden on Americans is set to increase even further in the coming year.

The Hidden Tax

The cost of regulation has often been called a hidden tax. Although the total does not appear anywhere in the federal budget, the multitude of rules, restrictions, and mandates imposes a heavy burden on Americans and the U.S. economy. According to a report recently released by the Small Business Administration, total regulatory costs amount to about $1.75 trillion annually, [1] nearly twice as much as all individual income taxes collected last year.[2]

Not all regulations are unwarranted, of course. Most Americans would agree on the need for protections against terrorism, although the extent of such rules is certainly subject to debate. Moreover, regulations are not necessarily inconsistent with free-market principles. Some, such as anti-fraud measures, protect the rights of consumers. But there is always a cost. And, for the same reasons that federal spending is reported, so, too, should regulatory costs.

Record Increases

This regulatory burden has been increasing for some time. During the presidency of George W. Bush, which many mistakenly consider as a period of deregulation, the regulatory burden increased by more than $70 billion, according to agency regulatory impact reports. In FY 2009, which spanned the Bush and Obama Administrations, rulemaking proceeded at a nearly unprecedented rate, with the addition of 23 major rules imposing $13 billion in new costs.[3]

But the available evidence indicates that regulatory costs increased last year at a far greater pace. According to data from the Government Accountability Office, federal agencies promulgated 43 rules during the fiscal year ending September 30, 2010,[4] that impose significant burdens on the private sector. The total costs for these rules were estimated by the regulators themselves at some $28 billion, the highest level since at least 1981, the earliest date for which figures are available.[5] Fifteen of the 43 major rules issued last during the fiscal year involved financial regulation. Another five stem from the Patient Protection and Affordable Care Act adopted by Congress in early 2010. Ten others come from the Environmental Protection Agency (EPA), including the first mandatory reporting of “greenhouse gas” emissions and $10.8 billion in new automotive fuel economy standards (adopted jointly with the National Highway Traffic Safety Administration (NHTSA)). Overall, counting the fuel standards, the EPA is responsible for the lion’s share of the reported regulatory costs—some $23.2 billion.

Among the most costly of the FY 2010 crop are:

Fuel economy and emission standards[6] for passenger cars, light-duty trucks, and medium-duty passenger vehicles imposed jointly by the EPA and NHTSA. Annual cost: $10.8 billion (for model years 2012 to 2016). For automakers to recover these increased outlays, NHTSA estimates the standards will lead to increases in average new vehicle prices ranging from $457 per vehicle in FY 2012 to $985 per vehicle in FY 2016.[7]

Mandated quotas for renewable fuels. Annual cost: $7.8 billion (for 15 years). Utilizing farmland to grow corn and other crops used in renewable fuels will displace food crops, leading food costs to increase by $10 per person per year—or $40 for a family of four, according to the EPA.[8]

Efficiency standards for residential water heaters, heating equipment, and pool heaters. Annual cost: $1.3 billion. The appliance upgrades necessary to comply with the new standards will raise the price of a typical gas storage water heater by $120.[9]

Limits on “effluent” discharges from construction sites imposed by the EPA. Annual cost: $810.8 million. The cost of the requirements will force the closure of 147 construction firms and the loss of 7,257 jobs, according to the EPA. Homebuyers also will bear some of the costs, with an increase in mortgage costs of about $1,953.

Regulatory Reductions Missing in Action

Measures to reduce regulatory burdens, by contrast, were few and far between in FY 2010. Only five significant rulemakings adopted last year reduced burdens. Of these, cost reductions were quantified for only two, for reported savings of $1.5 billion. This leaves a net increase in the regulatory burden of $26.5 billion.

Moreover, one of the five measures—though technically deregulatory in nature—relates to an unparalleled expansion of EPA powers. Due to its determination last year that greenhouse gases are pollutants, the agency is moving to set emissions limits for such gases. To follow the standards in the Clean Air Act would corral millions of currently unregulated “facilities,” including offices and apartment buildings, shopping malls, restaurants, hotels, hospitals, schools, houses of worship, theaters, and sports arenas into the EPA regulatory regime. In hopes of quieting political outrage over so sweeping a dictate, the EPA’s “Tailoring Rule”[10] set a minimum threshold level for regulation. Therefore, fewer facilities would be subject to permit requirements, making imposition of the emissions limits more feasible. Rather than reduce overall burdens, this action actually facilitated increased burdens.[11]

Actual Costs Likely Higher

The actual cost of regulations adopted in FY 2010 is almost certainly much higher than $26.5 billion. As a first matter, the cost of non-economically significant rules—rules deemed not likely to have an annual impact of $100 million or more—is not calculated (although such rules are believed to constitute only a small portion of total regulatory costs). Moreover, costs were not quantified for 12 of the economically significant rules adopted in FY 2010.

Many of the rules lacking quantified costs involve financial regulation. The Federal Reserve Board, for instance, did not quantify any costs for its new “Truth in Lending”[12] regulations—which impose fee and disclosure requirements for credit card accounts—although the new rules are generally expected to be costly. Similarly, costs were not calculated for new Federal Reserve Board regulations on prepaid electronic gift cards.[13]

It should also be noted that reported costs are likely minimized by allowing agencies to make the initial calculations, thereby casting their proposals in the best light. This could have a substantial impact: Overall, there is evidence that agencies systematically understate regulatory costs. In its 2005 report to Congress, the OMB’s Office of Information and Regulatory Affairs conducted ex ante analyses of regulations to test the accuracy of cost-benefit estimates. The study determined that regulators overestimated benefits 40 percent of the time and underestimated costs 34 percent of the time.[14]

Even a finding that costs exceed benefits does not necessarily stop a new rule from going into effect. For instance, in evaluating new regulations for train-control systems, the Department of Transportation identified costs of $477.4 million, and benefits of a mere $22 million. Nevertheless, due to a statutory mandate, the regulations were adopted.

The EPA is prohibited by law from considering costs in devising regulations under the Clean Air Act and other major environmental statutes. Thus, the agency recently set new, more stringent standards on emissions of nitrogen dioxide without formally considering the economic or technical feasibility of compliance.[15] While the EPA did prepare a cost-benefit analysis—concluding that the costs exceed the benefits—agency officials conceded they had no way of determining the number of localities that would be out of compliance under the new rule.

Lastly, it should be noted that annual compliance costs constitute only part of the economic burden of regulation. New rules also entail start-up costs for new equipment, conversions of industrial processes, and devising data collection and reporting procedures. These “first-year” costs exceed $3.1 billion for the 43 new FY 2010 regulations. For example, new restrictions on “short sales”[16] imposed by the Securities and Exchange Commission will require initial costs of more than $1 billion[17] for modifications to computer systems and surveillance mechanisms, and for information-gathering, management, and recordkeeping systems. Likewise, the EPA estimates one-time implementation costs of nearly $745 million for new limits on emissions from diesel engines used in energy production.[18]

More Rules on the Way

Many, many more regulations are in the pipeline. According to one estimate, financial regulation legislation recently adopted by Congress, known as the Dodd–Frank bill, will require 243 new formal rule-makings by 11 different federal agencies.[19] So wide-ranging are regulators’ new powers, in fact, that the Department of Health and Human Services has failed to meet one-third of the deadlines mandated by the new federal health care law, according to a report by the Congressional Research Service.[20]

Meanwhile, the new Consumer Financial Protection Bureau created under the Dodd–Frank measure will wield vaguely defined powers to regulate financial products and services, including mortgages, credit cards, even student loans. And, the Federal Communications Commission is mulling new regulations to limit how Internet service providers manage their networks. Such “net neutrality” rules, if enacted, would undermine investment incentives, thereby robbing the nation of much-needed broadband upgrades.[21]

Taken together, these initiatives embody a stunningly full regulatory agenda—indicating that this year’s record for regulatory increases will not stand for long.

Conclusion

The regulatory burden increased at an unprecedented rate during FY 2010, as measured by both the number of new major rules as well as their reported costs. Even more are on the way in 2011.

A number of steps have been proposed to stem this growth, ranging from automatic sunsetting of rules[22] to requiring congressional approval of all new major rules.[23]

Mere procedural reforms will not be enough to stem this regulatory tide. Regulatory costs will rise until policymakers appreciate the burdens that regulations are imposing on Americans and the economy, and exercise the political will necessary to limit—and reduce—those burdens.

—James L. Gattuso is Senior Research Fellow in Regulatory Policy, Diane Katz is Research Fellow in Regulatory Policy, and Stephen A. Keen is a Research Assistant, in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Appendix

Major Rulemaking Proceedings that Increased Regulatory Burdens, October 2009–September 2010

March 19, 2010, Department of Health and Human Services, Food and Drug Administration, “Regulations Restricting the Sale and Distribution of Cigarettes and Smokeless Tobacco to Protect Children and Adolescents”: cost not quantified.

May 6, 2010, Environmental Protection Agency, “Lead; Amendment to the Opt-Out and Recordkeeping Provisions in the Renovation, Repair, and Painting Program”: $419.5 million annually; $552 million start-up.

May 13, 2010, Department of the Treasury, Internal Revenue Service; Department of Labor, Employee Benefits Security Administration; Department of Health and Human Services, Office of the Secretary, “Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Dependent Coverage of Children to Age 26 Under the Patient Protection and Affordable Care Act”: $11 million annually.

May 28, 2010, Department of Transportation, Federal Aviation Administration, “Automatic Dependent Surveillance—Broadcast (ADS-B) Out Performance Requirements to Support Air Traffic Control (ATC) Service”: $100 million annually.

June 17, 2010, Department of the Treasury, Internal Revenue Service; Department of Labor, Employee Benefits Security Administration; Department of Health and Human Services, “Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act”: $25.2 million annually; $30.2 million start-up.

July 19, 2010, Department of the Treasury, Internal Revenue Service; Department of Labor, Employee Benefits Security Administration; and Department of Health and Human Services, “Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Coverage of Preventive Services Under the Patient Protection and Affordable Care Act”: cost not quantified.

July 23, 2010, Department of the Treasury, Internal Revenue Service; Department of Labor, Employee Benefits Security Administration; and Department of Health and Human Services, “Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Internal Claims and Appeals and External Review Processes Under the Patient Protection and Affordable Care Act”: $75.1 million annually.

July 28, 2010, Department of the Treasury, Office of the Comptroller of the Currency, “Registration of Mortgage Loan Originators”: $123.9 million annually; $283.3 million start-up.

August 2010

August 9, 2010, Department of Labor, Occupational Safety and Health Administration, “Cranes and Derricks in Construction”: $151.6 million annually.

August 12, 2010, Securities and Exchange Commission: “Amendments to Form ADV”: $20.5 million annually; $56.4 million start-up.

Major Rulemaking Proceedings that Decreased Regulatory Burdens, October 2009–September 2010

October 19, 2009, Securities and Exchange Commission, “Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers”: savings not quantified.

November 2, 2009, Department of Health and Human Services, Centers for Disease Control and Prevention, “Medical Examination of Aliens—Removal of Human Immunodeficiency Virus (HIV) Infection from Definition of Communicable Disease of Public Health Significance”: savings not quantified.

[4]Based on data from the Government Accountability Office, “Congressional Review Act Reports,” at http://www.gao.gov/legal/congress.html(October 21, 2010). Rules include those classified as “significant/substantive,” and excluding those of a budgetary nature or otherwise not of a regulatory nature. The GAO database covers rules issued from 1997 to the present. For previous Heritage Foundation reports that relied on this database, see James L. Gattuso, “Reining in the Regulators: How Does President Bush Measure Up?” Heritage Foundation Backgrounder No. 1801, September 28, 2004, at http://www.heritage.org/Research/Regulation/bg1801.cfm; Gattuso, “Red Tape Rising: Regulatory Trends in the Bush Years,” Heritage Foundation Backgrounder No. 2116, March 25, 2008, at http://www.heritage.org/research/regulation/bg2116.cfm; and Gattuso and Keen, “Red Tape Rising: Regulation in the Obama Era.”

[5]Based on cost figures provided in Regulatory Impact Analyses prepared by each regulatory agency. Where a range of costs was reported, the mid-point was used in the authors’ calculations. All figures in constant 2009 dollars. Historical data from 1981 through 2007 (shown in chart) obtained directly from OMB staff, and based on Figure 2.1 of OMB, “Report[s] to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local and Tribal Entities” for 2006–2009; 2009 figures from 2010 report Table 1-4. All reports available at http://www.whitehouse.gov/omb/inforeg_regpol_reports_congress(October 22, 2010). OMB data does not include independent agency rules and certain other rules, and is based on the date of OMB approval of the regulation. Heritage calculations for 2010 are based on the date of publication in the Federal Register. All figures in chart are net of deregulatory actions.

[6]This rule represents the first time that “greenhouse gas” emissions performance was applied in a regulatory context for a nationwide program.

[14] Office of Management and Budget, “Validating Regulatory Analysis: 2005 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities,” December 2005.

[16]Short-selling involves profiting from the decline of a stock price. An investor “borrows” stock and sells it, with the hope of a price drop. If the price does, in fact, decline, the seller buys back the stock at the lower price and returns the borrowed shares, profiting from the difference in the initial sale price and the decline.